Part F77 is utilized in one of Wilcutt Corporation's products. Company's Accounting Department reports following costs of producing 7,000 units of part which are required every year.
|
Per Unit |
| Direct Materials |
$7.00 |
| Direct Labor |
$6.00 |
| Variable Overhead |
$5.60 |
| Supervisor's Salary |
$4.70 |
| Depreciation of Special Equipment |
$1.50 |
| Allocated General Overhead |
$5.40 |
The outside supplier has offered to make part and sell it to company for $28.30 each. If the offer is accepted, supervisor's salary and all of variable costs, comprising direct labor, can be avoided. Special equipment utilized to make part was bought many years ago and has no salvage value or other use. Allocated general overhead represents fixed costs of entire company. If outside supplier's offer were accepted, only $9,000 of the allocated general overhead costs would be avoided.
a) Create the report which illustrates effect on company's total net operating income of purchasing part F77 from supplier rather than continuing to make it inside company.
b) Which alternative must the company select?